@Stratburst wrote:
Thank you for your reply. Understood that I will need to pay federal, social security and Medicare tax on the amount. The income is reported on 1099-MISC in box 7 as non-employee income. I ask because this income was earned as a direct result of my employment and therefore I don't view this as self employment income. The income however is not paid by my employer. It appears that I need to include the gross amount in line 1 of form 1040, and report it using 1040 schedule 2 and form 8919.
There's three issues here.
You say it was reported in a 1099-MISC box 7 non-employee compensation. If so, the payer used the wrong form. 1099-MISC has no box 7 for 2020, the payer should have used a form 1099-NEC and put the money in box 1. If you choose to enter this as self-employment income, you would have to enter it as if it was a 1099-NEC with income in box 1, since the Turbotax interview will not allow you to enter a box 7 amount for a 1099-MISC in 2020.
Second, because the franchisor reported the income in box 7 of the old-style 1099-MISC, they are indicating that it is "earned income" -- that is, income earned from providing a service or doing work. You would report this on a schedule C for self-employment. You do NOT report this as Misc income with a form 8919--that procedure is appropriate when the same employer provides you a W-2 and a 1099, but that procedure does not work if you have two different employers, and one provides a W-2 and the other provides a 1099.
Third, there is a decent question to be had over whether or not this is really "earned" income. But the problem is that, by using box 7, the payor is taking the position that it is income earned from working, and you have a high hurdle to overcome to report this as unearned income.
The analog you are looking for is the "spiff" in the automobile sales industry. A "spiff" is an incentive paid directly by the car manufacturer to the sales person, bypassing the dealership that pays the salesperson's regular salary. Because the salesperson does not work for the manufacturer, the spiff is taxable income, but it is not earned income. It is reported as "other" income, and is not subject to a schedule C, self-employment tax, or social security and medicare tax on form 8919. Interestingly the IRS publication that describes this is not available on the IRS web site, but it is archived elsewhere.
https://www.unclefed.com/IRS-Forms/2005/p3204.pdf
The IRS audit manual discusses this issue.
https://www.irs.gov/businesses/corporations/new-vehicle-dealership-audit-technique-guide-2004-chapte...
Here is a Turbotax discussion, although some of the instructions are outdated since the 2020 program changed how 1099s are entered.
https://ttlc.intuit.com/community/taxes/discussion/i-got-a-1099-misc-for-a-spiff-at-my-job-paid-by-t...
Now, back to your situation. Because this was reported in an old-format 1099-MISC as box 7 "non-employee compensation", the IRS will assume this was compensation earned by working, and you WILL get audited if you report it as miscellaneous income not subject to self-employment tax. At the very least, you will get a letter demanding an explanation, and if the examiner doesn't agree with your explanation, you will get assessed the tax, plus a late penalty and interest, and you will have to take your case on appeal to a supervisor or possibly Tax Court.
If you decide to report this as compensation for work performed, enter it as if it was a 1099-NEC with income in box 1 and prepare a schedule C for self-employment, and pay the SE tax. Don't prepare a form 8919.
If you decide to report this as miscellaneous income, report it as if it was a 1099-MISC with income in box 3, and answer the profit testing questions as "No" (not income earned from working, not intending to make a profit, not planning on doing the same work in the future, etc.)
